What Is Thematic Investing?
Thematic investing describes investment in trends that are expected to play out over the long term. The strategy is based on the expectation that investing in a particular theme will produce returns greater than traditional types of investments. It’s a top-down approach to investing that examines how societal shifts and factors at the macroeconomic level are expected to play out and affect the financial system and the economy, and in turn, the value of certain companies.
For example, bond investors looking to invest in corporate bonds might examine how inflation and monetary policy could affect the economy, and how this could have an impact on the business strategies of the companies they are interested in. After focusing on a particular theme in the financial market, a thematic money manager would invest in specific companies that stand to benefit.
Thematic investment can involve different types of assets, including stocks, bonds (typically corporate bonds issued by a company), mutual funds, exchange-traded funds, and private funds (usually in the form of portfolio companies owned by private equity firms).
How Does Thematic Investing Work?
Thematic investing is centered around a particular theme that is predicted to play out, and these themes typically fall into one of three types: megatrend, disruption, and sustainability. A megatrend tends to be transformative on a global scale, affecting economies and businesses. Disruption typically involves a dramatic change to an existing industry or the creation of a new market. Sustainability has become a popular category as investors focus on issues relating to climate change.
The past two centuries in particular have produced multitudes of examples in which macro trends and the introduction of new technologies or systems have disrupted an industry. For example, before machinery led to the advent of the industrial revolution, almost all goods were made by hand. Electricity provided a new form of energy transmission: It heated homes and helped to build the machines that replaced manual labor with the production of goods on a massive scale. Innovations in transportation—namely railroads, automobiles, and aircraft—moved people faster and hastened the delivery of goods. Advances in telecommunications—radio, television, and cable—helped people to communicate with each other quickly.
In the 1980s and 1990s, technology evolved further to bring about the home computer and ushered in the age of the internet. Technology will evolve even further, and that will create additional disruptions that investors will want to capitalize on, and disruptive innovation is one theme.
As nations become concerned about how all of these disruptions to society have led to global warming in the past century or so, sustainability issues with regard to climate change have become popular, and thematic investing in this area has focused on clean energy and alternative, renewable energy sources such as solar and wind.
How Does Thematic Investing Differ From Sector Investing?
Investing by sector doesn’t necessarily mean that you’re betting on a theme to play out. Sector investing typically means betting on stocks in a particular group such as banking, healthcare, semiconductors, or energy, but without having a particular agenda. Sector investing involves betting that companies in a particular category will generally rise in value along with their sector and the economy at large. Thematic investing, on the other hand, involves investing in specific companies that stand to benefit from opportunities revolving around a particular theme.
Fund management companies often have mutual funds and ETFs that have separate sector and thematic investing goals.
What Are the Downsides to Thematic Investing?
Risk is the biggest negative factor in thematic investing. There’s no guarantee that an objective under thematic investment will play out. Thematic investing is also subject to the swings of the financial markets. Shares of companies that stand to benefit from a particular theme aren’t necessarily immune to downturns in the stock market.
Additionally, if the companies an investor has selected do benefit from a large-scale societal, economic, or technological shift, there’s no telling exactly how long that might take, so thematic investing isn’t usually the best short-term money-making strategy.
How Long Has Thematic Investing Been Around?
Thematic investing is a relatively new investment strategy, but it has been around since at least the 2000s. One of the earliest exchange-traded funds focused on thematic investing is the iShares North American Natural Resources ETF, which is managed by BlackRock. The ETF focuses on investment in crude oil, natural gas, and forestry in North America.
Thematic investing has become more popular since the 2010s, particularly in technology due to rapid expansion within the sector. Advanced developments within technology, namely artificial intelligence, automation, robotics, genome sequencing, and cloud computing are being labeled by many investors as Industry 4.0.
How to Invest in Thematic Funds
Many major money management companies have funds focused on thematic investing. Some fund management companies have pages on their websites dedicated to thematic investing and provide information to potential investors on how to invest.
According to investment-research firm, Morningstar, there were $806 billion in assets under management for thematic funds as of the end of 2021. That represented a tiny fraction of the more than $100 trillion in managed assets globally.
Popular Thematic ETF Types:
- Disruptive innovation (technology)
- Renewable/clean energy
- Sustainable agriculture
- Digital healthcare
Frequently Asked Questions (FAQ)
The following are answers to some of the most common questions investors ask about thematic investing.
What Are the Benefits of Thematic Investing?
Thematic investing allows investors to focus on a particular theme, which typically aligns with their investment objectives. Instead of sector-based investing, thematic investing is concentrated into a limited number of assets. For stocks, that means investing in a selected group of companies, betting that their performance will outpace that of traditional sectors and benchmarks.
What Are the Most Popular Thematic Investing Strategies?
Technology and sustainability are two of the most popular themes. Disruptive innovation, in particular, is built on the premise that advances in technology, such as in AI and genome sequencing, will transform entire industries.